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Reason Foundation

Air Traffic Control Reform Newsletter #42

Topics include: responding to user fee critics; the need for real bonding for ATC Modernization; commercialization vs. privatization of ATC; what a Russ Chew is really worth; and other news.

Robert Poole
March 1, 2007

In this issue:


User Fee Critics Miss the Mark

The emerging debate on air traffic control user fees (i.e., direct charges for the services provided) is frustrating to watch, because so much of what is being said is misleading or beside the point. To begin with, most of the hue and cry from general aviation groups is still arguing against user fees—when the proposal does not apply to them! The FAA took them at their word when they said, over the past year, that if they end up having to pay more to cover their fair share of costs, they would prefer to continue paying theirs via a fuel tax. The FAA proceeded to do the most thorough, accurate, and fair cost allocation study in its history, treating general aviation as a marginal user (like they've always claimed to be) and hence asking them to cover only marginal costs, not a pro-rata share of fixed and common costs. That led to a large proposed increase in the GA fuel tax—which of course they don't want. But still they focus most of their rhetoric on "user fees."

To be fair, GA users would be charged a fee for terminal airspace in the avowedly rare cases when they use one of the country's 30 busiest airports. But FAA estimates that this charge would be about $5 for a Beech Bonanza, all the way up to a staggering $16 for a twin-jet Cessna Citation. As FAA Administrator Marion Blakey pointed out, those flying these planes from a big city would pay more than that to park their car at large airports.

And even the large increase in GA fuel tax, of 50 cents/gallon, isn't that much when compared with the overall cost of operating an airplane. It would add about $4 per hour to the cost of operating a typical piston plane. Fuel prices have increased by a lot more than 50 cents/gal. over the past five years—and yet GA aircraft sales increased more than 35% during this time period. As for business jets, a Learjet air taxi from Boca Raton to Palwaukee, as a commercial user (like it is today), would pay $363 more than it does now in ticket taxes, segment fee, and fuel tax. That's in the same ballpark as catering costs, which Air Executives, Inc. estimates at $250 each way for a three-hour corporate trip.

The FAA's proposal stresses greater fairness and a better match of the growth in revenue to the growth of flight activity and hence ATC workload. What it has not stressed is the increased efficiency of an aviation system in which users pay prices that are at least somewhat related to underlying costs. An excellent look at those issues is a new paper by Dan Kaplan of LECG, "Toward Rational Pricing of the U.S. Airport and Airways System." Kaplan outlines a system in which aircraft operators would be charged cost-related prices for en-route, terminal-area, and airport take-off/landing services. Each price would be based on at least an approximation of marginal cost, plus enough extra to ensure that the full costs of the services were recovered in each case. He makes a good argument for using congestion-surcharges and value-of-service factors for this latter aspect of pricing. (Since this paper has not yet been published, I've agreed to forward requests for copies to Dan; if you want one, let me know.)

Some of the debates over the "FAA's proposed user fees" have used numbers the agency has released as illustrations. What the debaters fail to point out (or may fail to realize) is that those numbers are "notional," presented by FAA as simply one possible application of the range of parameters it has asked Congress for permission to use in developing the actual fees. The intent is to work out the actual formulas with the aviation customers, presumably via the proposed new advisory board. That actually makes far more sense than asking legislators to spell out a new fee schedule.

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Real Bonding Is Needed for ATC Modernization

The FAA's reauthorization proposal addresses the need for increased investment to implement the proposed NextGen system, in part by calling for bonding authority. Unfortunately, it's a tepid proposal that hardly deserves to be called bonding. Specifically, it authorizes up to $5 billion (out of a total NextGen cost now estimated at $15-22 billion) in borrowing from the Treasury, to be paid back within five years. No, that's not a typo. Apparently, due to budget scoring rules, the only way FAA could get OMB approval for its proposal was to limit the term to five years.

Businesses (as well as government authorities such as airports and toll road agencies) issue revenue bonds to fund long-lived capital expenditures. The very sound finance principle is that long-lived assets deliver benefits over their useful lives and are efficiently paid for by users over that lifetime. So for airports and toll roads we have revenue bonds of 20 to 30 years. NextGen involves various high-tech systems (with somewhat shorter lives) but also the consolidation of ATC facilities into a much smaller number of new, high-tech centers. Such facilities would have lives more like those of airport facilities. Five years makes no sense for bonds for either type of capital expenditure.

Moreover, there are rumblings of concern in the airline community about how the decisions will get made regarding such bond-funded capital expenditures. I have written previously about the danger of "feeding the beast"—i.e., solving the agency's funding problem without reforming its spending decision-making and technology-management processes. This is the problem of governance reform—and like the bonding issue, it is addressed only in a token manner in the reauthorization proposal.

I appreciate that the proposed Air Transportation System Advisory Board is an improvement over the current FAA advisory boards, in that it is designed as a stakeholder board similar to that of Nav Canada. The problem is that it is purely advisory, able to "make recommendations on ATC modernization plans and major procurements . . . and fees," as well as selection of the Air Traffic Organization's chief operating officer. But its role is purely advisory. While a future FAA Administrator might take this board's input very seriously, he or she also might not. And that would leave the aviation customers paying the bills but actually having little real say in the fundamental decisions on fee structures, modernization timetables, and capital expenditures. Given FAA's long track record on previous modernization attempts, that is a very worrisome prospect.

Assuming Congress can be persuaded to make an exception to budget-scoring rules for the overriding purpose of timely implementation of NextGen, it should also empower the new board to make the basic decisions on capital investments. That way, "user pay means user say" would be more than just rhetoric.

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Commercialization versus Privatization of Air Traffic Control

In the January/February issue of Managing the Skies, former FAA Associate Administrator for Acquisitions and Research George Donohue made the case that a perfect storm is approaching the U.S. aviation system, with demand projected to outstrip capacity and the airport/ATC system unlikely to be able to respond in a timely manner. Suggesting that reform from within is unlikely, Donohue instead called for incremental outsourcing of ATC functions: oceanic, en-route, even the central flow-control function.

Since this publication is the official periodical of the FAA Managers Association, the article generated intense responses, and was judged by the editor as "the most controversial piece to appear to date." I was asked to pen a response, and that article ("Coping with the Perfect Storm") appears in the new March/April issue (www.faama.org/news/mts/MTS0307.pdf).

In my article, I agree with most of Donohue's thoughtful analysis of the problem, but I disagree with his proposed solution. Despite the careless use of the term "privatization" by opponents of ATC reform in this country, if you review what has actually taken place in the more than 40 countries that have reformed their systems, none has outsourced primary ATC functions to private-sector companies. In every single case, the existing ATC entity has been "commercialized," by making it financially autonomous from the government budget and putting it at arm's length from the government's aviation safety regulatory agency. But the same people and the same facilities are still in place after these changes are made. This is very different from outsourcing, say, oceanic services to Lockheed-Martin and en-route ATC to Raytheon.

In other words, what all the other countries have done instead of privatizing is to reform in place their existing ATC entity, converting it from a government department to a self-supporting air navigation service provider (ANSP). Only two of the more than 40 cases of such ATC reform can remotely be called "privatization." In the case of Nav Canada, the new entity exists entirely outside the government, set up as a not-for-profit corporation under a federal charter that provides for a stakeholder board of directors. And in the case of NATS in the United Kingdom, that ANSP was spun off from the UK's Civil Aeronautics Authority as a "public-private partnership," in which airlines and BAA own 46%, the employees 5%, and the government 49%. But even in these two cases, the model was reform-in-place, not outsourcing. The same controllers and managers went home one day as civil servants and returned the next day as employees of the new ANSP.

I closed the article by suggesting that the threat of Donohue-type outsourcing might seem remote today, but is not a far-fetched future scenario. Suppose Congress rejects FAA's reform proposal and opts to keep in place more or less the status quo, perhaps with a bit more tax funding. And FAA then attempts to implement the hugely complex, high-risk NextGen system. And suppose that the outcome is similar to what we've seen over the past 20 years with NAS Plan and all the other major technology procurements: systems that are delivered late, cost far more than estimated, and don't end up increasing productivity or reducing customer costs. But both FAA and JPDO tell us that within 10 years, the system will be up against its capacity limits. The only way to keep it operating safely will be to ration capacity—meaning some horrible combination of delays and restrictions on flight activity.

A serious failure or major delay in implementing NextGen, I wrote, delaying millions of passengers and restricting business jet access to congested terminal areas, "could lead to pressure for hasty corrective action by a future Congress . . . such as outsourcing en-route or terminal operations." That would be a far worse outcome for FAA managers and controllers than proceeding with the reform-in-place model.

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What A Russ Chew Is Really Worth

If we convert the FAA's Air Traffic Organization into a self-supporting air navigation service provider, as all the other OECD countries have done, the new ATO will need a chief executive officer, accountable to the board of directors for performance—both operational (running the system efficiently) and strategic (implementing NextGen in ways that provide clear cost/benefits for the customers). That's very different from the far more narrowly defined chief operating officer position of the current ATO that is part of the FAA bureaucracy.

It took the FAA almost two years to find and hire the heroic Russ Chew, who did a tremendous job as the ATO's first COO over the past few years. The difficulty in attracting someone with the requisite technical and managerial excellence is twofold. First, the civil service compensation is far below what's available in the private sector for top-flight management. Second, the ATO's COO is not able to make the key strategic and operational decisions that a CEO or even a COO in a business does; he must answer not only to the FAA Administrator (who is also his safety regulator) but also to the 535-member "board of directors" known as Congress, and to various overseers at DOT and OMB.

Some indication of the compensation disparity can be seen in the package Russ Chew has accepted from his new employer, JetBlue Airways. As COO of the airline, his base salary is $300K, and he is eligible for annual incentive bonuses, initially guaranteed for two years at 75% of base salary. He received a signing bonus of $200K. And he is eligible to receive an initial award of 50,000 restricted stock units and annual grants of 10,000 restricted stock units.

Needless to say, there is no way anything remotely like that can be offered within a government department. But that's hardly unusual compensation for the COO or CEO of a national company. If we're serious about implementing a highly sophisticated new paradigm for air traffic management (NextGen) and want an executive team that can be held accountable for delivering it on time, on budget, and in a form that delivers real value for customers, we're going to have to make the institutional changes needed to attract high-level technology managers from the private sector and give them the authority to get the job done.

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News Notes

Airlines Like These ANSPs. The International Air Transport Association says Airservices Australia, Austrocontrol, Nav Canada, and ROMATSA cooperate very well with airlines on issues such as charging and modernization, and should be models for other ANSPs, according to Aviation Daily (Feb. 20, 2007). IATA is frustrated with other ANSPs, says the brief news item.

NATS Assists Romanian Controller Training. The U.K.'s National Air Traffic Services bested other ANSPs to win a controller training contract with ROMATSA, the commercialized ANSP of Romania. The initial training class was expected to begin by the end of January at the NATS training center in Bournemouth.

DFS the Most Punctual in Europe. Based on new airspace delay figures released by Eurocontrol, Germany's Deutsche Flugsicherung (DFS) is "the most punctual air navigation services provider" in Europe, according to a news release from DFS. In the past year, 97% of flights in German airspace arrived without any delays caused by ATC. The report found that, overall, airlines were the cause of 50% of delays, lack of airport capacity 17%, and weather 15%. In Germany, the average flight delay was 0.63 minutes, of which DFS caused only 0.07 minutes (4.2 seconds). Germany has the busiest airspace in Europe, and DFS handled 2.98 million flights last year, compared with 2.87 million the year before.

Airservices' GPS Landing System on Offer. In February Australia's ANSP, Airservices Australia, announced a commercial agreement with Honeywell to offer two new GPS-based systems they have jointly developed. The Ground-Based Augmentation System (GBAS) is a low-cost alternative to conventional instrument landing systems (ILSs), while Ground-Based Regional Augmentation System (GRAS) provides en-route and approach coverage. Prototypes are in use at Sydney Airport and are being used by Qantas. Airservices will market them in Asia, while Honeywell does the same in Europe and the Americas.[CK]

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Quotable Quotes

Sen. Rockefeller on User Fees
"Chairman Jay Rockefeller (D, WV) said he's been 'increasingly attracted' to user fees, and the idea that 'you get what you pay for. There's nothing in the words, user fee, that offends me,' he said. 'There really isn't. It offends a number of sections of the aviation industry, but I can't help that.'"
--"The Main Event," by David Bond, David Collogan, and John M. Doyle, Aviation Week, Feb. 19, 2007.

Blakey on User Fees
"If you think that a user fee is troublesome, try an air traffic system that is totally gridlocked. When that happens, the argument about who flies most or who pays what isn't going to matter."
--FAA Administrator Marion Blakey, at Royal Aeronautical Society event, Feb. 20, 2007, quoted in Aviation Daily, Feb. 22, 2007.

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Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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